What is a risk rating?

A risk rating (also known as risk grading) is what banks use to assess your ability to meet your financial commitments.

In Australia, businesses borrowing $1 million or more are risk rated annually on receipt of financial statements. (Banks also use risk grades for businesses with borrowing under $1 million as the starting point for negotiations, however, it’s not a mandatory annual process.)

In all cases, regardless of the size of business or level of debt, banks don’t usually communicate the results of a risk assessment. Therefore, you might have little or no awareness of what your risk rating is – until it’s time to talk terms with the bank.

How is my risk rating assessed?

All banks have a specific set of metrics they use to rate their customers. These are known as risk grade models. They generally include an assessment of financial results and debt levels. However, a risk rating is not just about numbers. Other factors such as management capability and industry risk may form part of the assessment. Your business behaviours also provide important information for banks when they assess your risk.

Can I find out my risk rating?

Banks don’t often share the results of their risk rating process, which means you might be operating in the dark on how banks view your business in terms of financial performance and risk.

BDO’s Debt Advisory team, led by former senior banking executive Peter Winterflood, think it’s important for you to understand what banks do and how bankers think. They’ve developed a survey using metrics similar to those used by the banks to give you a clearer view of your financial position.

How does BDO’s risk assessment tool work?

BDO’s Financial Health Check is a free information tool that reflects part of the bank’s risk grading process.

You complete a short survey and we interpret the results to give you a risk score. (The results are not recorded or shared.) The survey findings are supported by tailored information to help you become more informed about financial and strategic decisions based on your results.

Understanding your risk rating can enable more productive conversations between you and your bank at every stage in the business cycle.